On 9 December 2022, HM Treasury published a statement made by the Chancellor of the Exchequer, Jeremy Hunt, on a widespread set of reforms of the financial services sector, referred to as the ‘Edinburgh Reforms’, which, the statement says, are designed to boost growth and make the UK more attractive to investors, with Hunt noting that the government is “embracing the new opportunities presented by our position outside the EU”. In doing so, many of the reforms appear to roll back protections put in place following the global financial crisis, which has been questioned by some, considering the UK is currently in a recession.
These reforms are said to build on the government’s reform agenda through the Financial Services and Markets Bill 2022-23 and, together, should set the regulatory agenda for 2023 and beyond. The Chancellor has divided the reforms into four categories, as outlined below:
1. A competitive marketplace promoting effective use of capital – this category is further divided into five sections:
- Building a smarter regulatory framework for the UK: A policy statement on building a smarter financial services framework has been published, aiming to repeal retained EU law and substituting it with a new framework specifically for the UK. The changes will include a number of measures aimed at the wholesale market, including the regulation of short selling (see further below), with a call for evidence announced, as well as a consultation on plans to repeal the regime for packaged retail and insurance investments products (PRIIPS) and its replacement with a retail disclosure framework.
- Updating banking regulation and ring-fencing regime: Further to the government’s published response to the final report of the independent review on ring-fencing and proprietary trading, in 2023 the government will consult to reform the ring-fencing regime, put in place to protect retail banks from the impact of riskier banking practices in the aftermath of the financial crisis, with a view to introducing secondary legislation later that year. The proposed reforms include taking lenders who do not have major investment arms out of scope, removing blanket geographical restrictions and raising the threshold of core retail deposits that a banking group must hold to fall within the regime from £25 billion to £35 billion.
- Regulatory focus on growth and competitiveness: The Chancellor has presented before Parliament new remit letters for the Financial Conduct Authority (here) and the Prudential Regulation Authority (here), with detailed recommendations for how the regulators should have regard to the government’s economic policy. This includes a new secondary objective for the regulators - the FCA and PRA - “to provide for a greater focus on growth and international competitiveness while maintaining their existing primary objectives”, potentially encouraging looser regulation to increase competitiveness. Additionally, a review of the Senior Managers and Certification Regime will take place in the first quarter of next year. It is noteworthy that enforcement actions under this regime have thus far been lower than expected when the regime was first brought in, so some quarters may welcome reforms in this regard.
- Wholesale market reforms: The Chancellor announced various measures commenced by the government which include, among others, the laying before Parliament of the Markets in Financial Instruments (Investor Reporting) (Amendment) Regulations 2022 (SI 2022/1297) and the introduction of secondary legislation in Q1 2023 to remove burdens for firms trading commodities derivatives as an ancillary activity.
- Unlocking investment to drive growth: Along with the government’s plans to reform Solvency II, the Chancellor announced a number of new consultations and amendments which include, among others, a number of pensions and tax related reforms.
2. Sustainable finance: the government will take specific steps, such as publishing an updated Green Finance Strategy in early 2023, to deliver on its pledge to align the financial services sector with net zero and to support the sector to unlock the necessary private financing.
3. Technology and innovation: the Chancellor has announced concrete steps the government will take in order to make sure the sector is prepared to embrace and facilitate the adoption of cutting-edge technologies.
4. Delivering for consumers and businesses: The Chancellor repeated the government’s commitment to a financial services sector that supports the real economy and has published its consultation on the Consumer Credit Act and confirmed its intention to work with the FCA on the distinction between investment “advice” and “guidance”.
Response to the reforms has been mixed with the package described both as “marginal” and a “bonfire” of regulation. We will be tracking the developments and their impact on FI and D&O exposures.